An Empirical Investigation of Fluctuations in Manufacturing Sales and Inventory withing a Sticky-Price Framework

T he macroeconomics literature has recently witnessed a resurgence of interest in issues related to nominal price rigidities. In particular, advances in computational methods have allowed for the analysis of fully articulated quantitative general equilibrium models with inflexible prices.1 Because nominal price rigidities create predictable variations in sales, these models provide a natural setting for the study of inventory behavior. Specifically, firms that face increasing marginal costs wish to smooth production and, given predictable variations in sales, can naturally use inventories to accommodate any difference between a smooth production volume and sales. Hornstein and Sarte (1998) study the implications of sticky prices for inventory behavior under different assumptions about the nature of the driving process. Regardless of whether the economy is driven by nominal demand or real supply shocks, the authors find that an equilibrium model with inflexible prices can replicate the main stylized facts of inventory behavior. Namely, production is more volatile than sales while inventory investment is positively correlated with sales at business cycle frequencies. More importantly, their study also makes specific predictions about the dynamic adjustment of inventories and sales to these shocks. In response to a permanent positive money growth